Copper Price Action May Signal Faster Global Growth

On a technical basis, copper prices are poised to break higher, which suggests that global economic activity is accelerating. We were bullish towards industrial metals between August 2012 and January 2013 and captured about 9% of the subsequent rally. We have been neutral since the start of this year, as we thought a positive first half of 2013 for global growth (particularly in China) had already been priced in. Nonetheless, a break of resistance for three-month LME copper at around US$8,200/tonne would suggest additional near-term gains. (Note: click on charts to enlarge image.)

Three-Month LME Copper, US$/tonne

With gold prices flat-lining, this suggests that the ratio of copper to gold prices could be heading higher as well. Historically, this has indicated an improving global growth outlook.

Ratio of Copper To Gold

There is a similar picture in the oil-gold ratio, which is testing upside resistance. We recently highlighted an upward break in oil prices and hold a positive near-term view towards the commodity (see Business Monitor Online, ‘Oil Looks Resilient’, January 13, 2013).

Ratio Of Brent Crude Oil To Spot Gold

The upside risk to our neutral view on industrial metals is that the ‘risk on’ trade that began in September 2012 and which has been most apparent in equities will continue well into 2013 and eventually drag commodities higher. Commodities have significantly underperformed equities since November. A break higher by copper versus gold would suggest that commodities may be on the move again, and could prompt upward revisions to our industrial metal price forecasts.

This would also augur poorly for bonds, which are already under upside pressure and have probably bottomed out, in our view (subscribers should refer to our Global Asset Class Strategy Update, 29 January 2013). The copper-gold ratio tracks US 10-year Treasury yields reasonably closely, at least in terms of the direction.

Ratio of Copper To Gold, And US 10-Year Treasury Yield (%)

So putting this all together, if the copper-gold ratio breaks higher, it would lend further credence to our view for improving global economic activity and the bottom of US yields. A significant move higher in both would suggest that a normalisation of monetary policy could occur earlier than we – or the market – currently expect. As such, we maintain our long-held view that we prefer equities to developed world bonds.